Two weeks ago Tobe Gerard shared her expertise on long-term care insurance. You may read her post by clicking here. One reader, Beth, posed an interesting follow-up question, reprinted below with Tobe’s response.
Beth: Tobe, thank you for a very informative article. Regarding your rule of thumb “that you should be able to comfortably fit this item into your budget,” can you elaborate why? I know several people who are making budgetary sacrifices to pay for a robust long-term care insurance policy that will enable them to receive high quality care that they can select when the time comes.
Tobe: The main concern for anyone who purchases a policy that takes up an inappropriate portion of his/her budget is that if financial challenges are encountered down the road, he/she might be forced to let the policy lapse; as a result, the advantage of having purchased the coverage in the first place would be lost.
Insurance companies suggest that you don’t spend more than 6-7% of your net income on long-term care insurance. Additionally, I believe that not only should you not spend more than 6-7% of your income on long-term care insurance while you are working, but, more importantly, long-term care insurance shouldn’t be projected to be more than 6-7% of your overall expenses in retirement. Obviously, because of unique situations, this rule of thumb may not apply. In most of these unique situations, a policyholder’s long-term care insurance policy is being paid for by someone else (e.g., a trust fund, employer, etc.).
As far as the purchase of a “robust policy,” it’s important to say that all of us have very different financial profiles when it comes to our assets and income. Some people prefer to self-insure more of the cost of long-term care because they have significant assets and income, and they wouldn’t mind using some of these if/when the time comes. These are the people who usually have high deductibles on their other insurance policies (e.g., automobile and homeowner). Because some people don’t have significant assets and income, they may feel that even a rudimentary policy will provide a buffer before they would need to tap into their retirement portfolio. Additionally, some people are quite affluent and just want the best policy that money can buy, and they don’t worry about the cost whatsoever.
Oftentimes, we find that people who put other things aside to purchase a “robust policy” have particular reasons for doing so. Perhaps they have witnessed firsthand a long-term care claim where there was no long-term care insurance in place and they have seen how it has devastated their family, both emotionally and financially. Furthermore, some may choose to put other things aside to purchase a “robust policy” if they fear they may potentially have some kind of cognitive impairment in the future.
I hope this answers the question. If you have any additional questions about long-term care insurance, please post them here.
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